In this digital age of social media, we are constantly inundated with a barrage of data and information which constantly makes us process news we hear today, and often forgetting the news we heard yesterday or the month before. In this modern age, there is currency attached to the news –i.e how current is the news.
3-4 months ago we hear constantly about the R word i.e recession after the inverted yield curve appeared. Then as US employment data turned out to be very positive, the consensus view was that we shouldn’t worry about a recession as the US is now at its lowest unemployment rate in 50 years.
That said, no one talks about the unemployment data being a lagging indicator and if one were to do research it may well surprise you that in the last 6 US recessions, the GDP rate in the year prior to the recession have been healthy and does not reflect that a recession is anywhere near or soon. Yet a year later recession occurred.
In 2000 the year before the 2001 recession in the US, US GDP was running at 4.10%! And just prior to the GFC in 2008, US GDP was at 1.9%. At the rate it is going, US will possibly end up with a 2.1-2.2% GDP rate in 2019. Mainstream commentators will continue to say the US economy is robust, yet we have seen the exact opposite in the past US recessions. The reality is that a 2% GDP this year doesn’t say much about not going to have a recession next year as much as it doesn’t say much if we are. Recessions have happened in subsequent year when GDP was running even as high as 4-5%.
Column 1
Column 2
Column 3
0
US GDP Growth
Recession
1
1969
3.10%
1970
2
1972
5.30%
1973 Stagflation
3
1978
5.50%
1979
4
1989
3.70%
1990
5
2000
4.10%
2001
6
2007
1.90%
2008
So this data from history serves to debunk mainstream view and focus on the data as we see today, tomorrow and next week. So just because the R word is no longer mentioned in mainstream news does not make anymore unlikely it won’t happen- it is not the case of Out of Sight Out of Mind.
I have mentioned in this thread before that I believe it is more likely than a market (could be bond or equities) crash that causes a Recession , rather than a Recession causing a market crash. And that is the view of Alan Greenspan. And the markets can crash independent of a recession- for instance, a liquidity crisis or a major default somewhere or a systemic risk event can cause a panic and sudden loss of confidence and confidence once loss takes considerable time to recover and sometimes may not even recover.
Because of the fluidity in market perception and interpretations, long held beliefs and assumptions can constantly change. For example, where once the market can accept an upward moving stock with a PE >100 in a positive market environment, once cautiousness sets in , even though the markets continue to hit record levels, that taken for granted assumption is being thrown out. You then see rotational plays, inconsistencies in market reaction. Most of you should know by now that despite the indices (even ASX) reaching new heights, some of your stocks are still languishing behind as if the market has yet to recover. And we have certainly seen that with many of the growth stocks with higher PE valuations. What this suggests is that beliefs and assumptions in the markets are never static or given constant even though for a period of time they exhibit that behaviour. Hence the dangers of being too fixated to that long held belief because it can adversely impact any stock. A hero and darling stock today can be a laggard once the belief and assumption changes. As an example, Afterpay is a much loved darling stock today that generates high growth but when people start thinking that we are at the cusp of a new era of declining consumer spending in the US, you can bet the hero status will begin to wane considerably.
Indeed, no one says stock market investing is an easy thing. There are so many considerations but even for a well rounded research-oriented person, it is the shifting market mood that is most blindsiding. It is not enough to know if your company will do well or not; it could well do so but the market may suddenly decide not to give it as much credit as it once did or you get a fundie come out of the blue to take advantage of the precarious state the stock is in to make a short call. And in my years of investing, I have never witnessed a market that is in such as constant state of flux, moving between positivity and negativity within short periods.
